Price bands and circuit breakers are tools that cannot be done without in the stock exchanges to prevent frenzied price fluctuations and bring stability. Price bands limit the extent to which one share can be sold on a trading day, whereas circuit breakers are levied on market indices like the Nifty 50 and Sensex. Trading can be suspended for some time if these thresholds are crossed.
How Price Bands and Circuit Breakers Work
A price band facilitates finding the highest and lowest price at which a stock can travel in one day. Here, if a stock closes at Rs 10 price band it can only be traded at Rs 90 to Rs 110 the following day. If the prices touch any of the two limits, trading of that stock is suspended for sometime.
Price bands are fixed at 2%, 5%, 10% or 20% based on the regulation of the stock.
Circuit breakers work similarly but for the whole stock market. If the Nifty 50 or Sensex rises or falls by 10%, 15%, or 20%, trading is halted on all exchanges.
Benefits of Price Bands and Circuit Breakers
Some benefits of Price Bands and Circuit Breakers are:
- Market Stability: Stops sudden price fluctuations and panic-based transactions.
- Investor Protection: Provides investors with time to respond to large price movements.
- Fair Trading: Maintains price movements under control and within predictability.
Conclusion
Price bands and circuit breakers are important safeguards in the stock market. They help in maintaining orderly trading and prevent any sort of panic driven trades. It protects investors from any sudden losses. Hence, understanding these tools is important and will help traders to navigate through the market with greater confidence and increased chances of profits.